OUTCOME OF TODAY’S ECB MEETING:
KEY ECB INTEREST RATES:
*All ECB policy rates down by 25bps
* Unanimous decision
OUTLOOK FOR THE ECONOMY:
* ECB more worried, but baseline scenario of a gradual recovery in the course of 2012 remains in place
OUTLOOK FOR INFLATION:
* ECB more optimistic. Inflation rates may already fall below 2% before year end 2012.
REFINANCING OPERATIONS:
* All measures unchanged in place
* No indication of any additional non standardised measure in the near future
CONCLUSION: Today the ECB cuts its policy interest rates by 25 bps each. Any positive effect of this decision on the economy will be very limited. Refinancing costs of those monetary financial institutions will fall which are heavily dependant on ECB liquidity. On the other hand, any hopes that the interbanking market will benefit from an ECB deposit interest rate of zero are premature. Banks are still ready to lose out for safety. Furthermore, life insurers and money market funds face an even more difficult environment. The ECB rate decision will not ease pressure on the weak EMU member states to consolidate their budgets to regain confidence in the market The ECB refrained from introducing renewed purchases of government bonds which would have been the more effective measure in this environment. Therefore spreads between government bonds will remain high.
ECONOMIC ANALYSIS: The ECB stated that some of the previously identified downside risks to the euro area growth outlook have materialised. Indicators for the second quarter of 2012 point to a renewed weakening of economic growth and heightened uncertainty. Beyond the short term the ECB expects the euro area economy to recover gradually. Therefore the ECB’s baseline scenario has not changed. Downside risks to this outlook prevail. Regarding price developments, the ECB Governing Council expects HICP inflation rates to decline further in the course of 2012 and to be again below 2% in 2013. The ECB sees some probability that the HICP inflation rate could fall below 2% already before year end 2012. Over the policy relevant medium term horizon, underlying price pressures are expected to remain moderate. Risks to the outlook continue to be broadly balanced over the medium term. Inflation expectations are firmly anchored.
MONETARY ANALYSIS: The underlying pace of monetary expansion remained subdued in the first five months of 2012. The annual growth rate of loans to the private sector continued to decelerate in May. To a large extent, subdued loan growth reflects the current cyclical situation, heightened risk aversion, and the ongoing adjustment in the balance sheets of households and enterprise which weigh on credit demand.
REFINANCING OPERATIONS/ NON STANDARDISED MEASURES. All measures remain unchanged in place. No additional non-standardised measures were announced.
OUTLOOK FOR MONEY MARKET RATES: Today’s rate cut will put some more downside pressure on money market rates.
SEB